Exercise 11-2 (Algo) Dropping or Retaining a Segment [LO11-2]

The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 936,000	$ 268,000	$ 409,000	$ 259,000
Variable manufacturing and selling expenses	470,000	118,000	198,000	154,000
Contribution margin	466,000	150,000	211,000	105,000
Fixed expenses:
Advertising, traceable	70,300	8,600	41,000	20,700
Depreciation of special equipment	43,000	20,600	7,200	15,200
Salaries of product-line managers	114,600	40,000	38,900	35,700
Allocated common fixed expenses*	187,200	53,600	81,800	51,800
Total fixed expenses	415,100	122,800	168,900	123,400
Net operating income (loss)	$ 50,900	$ 27,200	$ 42,100	$ (18,400)

*Allocated on the basis of sales dollars.

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:

1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

2. Should the production and sale of racing bikes be discontinued?

3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.